Despite fierce opposition, officials are set to approve $80 million in subsidies for a 600-room hotel at the Convention Center.

The lot located at Northeast 3rd Avenue and Multnomah Street doesn’t look like much.

There’s a
debris-filled hole, where a former Teamsters union hall was demolished
last week; a ramshackle office building with a couple of tenants; and a
parking lot dotted with wrappers from an adjacent Burgerville.

IF WE BUILD IT: Metro says a new Hyatt hotel will enliven the Oregon Convention Center.

IMAGE: Ankrom Moisan Architects/Mortenson Development

It is here that Barry
Schlesinger, the struggling developer who owns the 3-acre property,
envisions a gleaming hotel tower crawling with conventioneers.

Metro Council
President Tom Hughes, whose agency operates the nearby money-losing
Oregon Convention Center, sees the property as a route to respectability
for his agency—and a second term for himself.

And the secretive financier Gordon Sondland sees a heavily subsidized threat to his downtown hotel empire.

Those visions will collide this week at City Hall.

Schlesinger’s land is
at the center of a heated battle over whether to build a hotel adjacent
to the convention center. For more than a quarter of a century,
politicians, developers and tourism promoters have wrestled with that
question.

It is finally
decision time, as the rising clamor of the rhetoric surrounding the
issue shows. At a Labor Day speech, for example, Hughes accused
opponents of the proposed 600-room Hyatt hotel of engaging in “class
warfare.”

The City Council will consider
a measure Metro has already approved: pumping $80 million of taxpayer
money into a proposed $198 million hotel. The transaction would give the
multibillion-dollar Hyatt Hotels Corp. ownership of the hotel and all
potential profits, while counting on public funding to repay the
project’s debt.

On Thursday,
Multnomah County commissioners will hold their first hearing on the
issue. Metro, the city and the county all need to approve any convention
center hotel.

On one hand,
taxpayers have already spent $200 million building the convention
center, which operates at a large and growing loss. Tourism boosters say
a new hotel is necessary for the convention center’s success and for
the continued development of the city’s convention trade.

On
the other hand, local government’s recent results in subsidizing
businesses in Portland—such as wind turbine-maker Vestas, solar
panel-maker SoloPower and bankrupt battery-maker ReVolt—have been
failures.

Sondland, who has
invested heavily in downtown hotels, is deploying his wealth and
connections in an attempt to make sure the hotel subsidy never happens.

Elected officials
fear being labeled anti-business, but citizens are notoriously reluctant
to hand cash to large, profitable companies such as Hyatt.

Pollster Adam Davis recently conducted a survey of more than 3,000 Oregonians.

“When you get to
public subsidies,” Davis says, “Oregonians don’t like them. People just
feel that the best thing you can do for economic development is to keep
government out of it.”

Mark Williams, who
ran the convention center for eight years, says the 1
million-square-foot facility will never flourish without a hotel.

“If you want a
convention center to succeed, you have to have a convention center
hotel,” Williams says. “But people are ready to believe the worst about
government, and unfortunately they are often right.”

The Oregon Convention Center’s
twin glass spires may not be Portland’s proudest architectural
monument, but they are a landmark in a section of Northeast Portland
characterized by empty lots and fast-food joints.

Then-Mayor Bud Clark
oversaw the building of the convention center, which opened in 1990. In
2003, then-Mayor Vera Katz used $116 million of tourism taxes to expand
it. But the center has never had an adjacent first-class hotel.

Today, the
Metro-operated facility loses $10 million a year. Debt service costs
another $6 million annually. Metro’s consultant, the Strategic Advisory
Group, says the convention center generates tax revenues equal to those
costs and hundreds of millions in spending that would not otherwise
occur.

The number of annual
events at the convention center is declining, however, and the center is
increasingly oriented toward low-budget trade shows. Boosters say a
hotel would reverse the slide.

“The last large
convention hotel to be built, outside of Las Vegas or Orlando, without
public participation was the Chicago Sheraton that opened in the early
1990s,” according to a 2012 Metro consultant’s study. “Today, on
average, private investors can achieve their return on investment in a
convention center hotel only if their basis is approximately two-thirds
of the cost to develop.”

That’s because
convention business is sporadic. The hotel must block out at least 500
rooms and include more meeting rooms and expensive amenities than the
market would otherwise support. And Hyatt promises union wages for hotel
workers.

Opinions on the issue are mixed. The Portland Business Alliance wants the hotel.

And Greg Goodman,
whose family owns 25 blocks of Portland real estate, says a new hotel
would spur activity in the underdeveloped area between the Burnside and
Broadway bridges.

“It will be a catalytic investment like light rail,” Goodman says.

But Tim Duy, director
of the Oregon Economic Forum at the University of Oregon, disagrees. He
says the economic benefits that tourism boosters claim are notoriously
unreliable, and the jobs a hotel would create are marginal.

“If there were a real
shortage of hotel space in the community,” Duy says, “the private
market would fill that need. There’s no public benefit there. It’s not a
useful expenditure of public dollars.”

BETTER DAYS AHEAD: Barry Schlesinger demolished a former Teamsters hall for a condo project next to where he hopes the Hyatt will be built.

IMAGE: Misha Ashton Moore

Barry Schlesinger, 64, is more rumpled
than many Portland developers. He’s got the meaty hands and bad back of
a commercial fisherman, the job he had before joining his family’s
real-estate business.

Most days,
Schlesinger would still prefer chasing salmon than sitting through
another meeting on the proposed convention center hotel.

But along with his brothers, Paul and Mark, Schlesinger owns or manages 1 million square feet of commercial real estate.

In 2009, records show
Schlesinger bought land next to the convention center for $10.75
million. The purchase was highly leveraged—he borrowed $9.7 million and
agreed to pay it back in 18 months.

Then-Mayor Sam Adams
was pursuing a hotel project in which the city, rather than Metro, would
issue bonds and the hotel would be publicly owned.

That deal collapsed amid the recession.

Meanwhile,
Schlesinger came under pressure. In December 2010, his company lost a
high-profile contract to run the city’s parking garages.

Then last year, court documents in a family dispute showed the family’s parking company had lost millions of dollars.

With interest costs
mounting on the short-term loan he used to finance the hotel
property—and has had to extend three times—Schlesinger worked behind the
scenes to help Metro resuscitate the project and aligned himself with
Mortenson Development of Minneapolis and Chicago-based Hyatt Hotels. The
development team hired Gallatin Public Affairs, an influential Portland
lobbying firm.

“It’s very important to our family to get this deal done,” Schlesinger says. “It’s a fair deal that minimizes public risk.”

The person who really got the deal moving, however, was Hughes.

“In Tom Hughes, we found a champion who understands the job and economic impact we create,” says Travel Portland’s Miller.

As mayor of Hillsboro
from 2001 to 2009, Hughes, 70, helped Intel expand and was key in
luring SolarWorld and Amgen to Washington County.

Hughes then made job
growth the center of his 2010 campaign for Metro president. That was a
shift—Metro’s core functions are land-use and transportation planning
and disposing of the region’s solid waste.

As Metro president,
Hughes’ penchant for globe-trotting economic-development missions is as
incongruous as his Waylon Jennings-like appearance is out of step with
the typical undernourished, bike-riding Metro planner. Despite his
foreign travel (“Metro-À-Go-Go,” WW, Aug. 15, 2012), Hughes found his biggest target a block from Metro headquarters—the convention center.

“It’s a tremendous opportunity for Portland and the whole region,” Hughes says.

He put Metro’s staff to work figuring out an approach that could win political support (see sidebar, page 18).

Schlesinger says
Hughes’ deal will bring some balance to economic-development spending.
For decades, City Hall has used urban-renewal subsidies to develop
downtown, the Pearl District and South Waterfront.

“At some point,” Schlesinger says, “the east side ought to get something, too.”

Travel Portland’s
board members include the manager of the city’s largest hotel, the
800-room Hilton, which opposes the new Hyatt project.

But no critic
possesses the clout of downtown hotelier Sondland (see below), who declined to be interviewed for this story.

His spokesman, lobbyist Len Bergstein, has been beating back headquarters hotel concepts on Sondland’s behalf for a decade.

“It does not make
sense on any level,” Bergstein says. “The public provides a giant
subsidy but gets all the downside, while Hyatt gets a brand-new hotel
very cheaply and gets all the upside.”

Industry figures show
the hotel occupancy rate downtown, where Sondland operates, is about 78
percent, 15 points higher than the national average.

The risk to Sondland
is that a subsidized hotel on the east side, next to the convention
center, could undercut downtown’s high-occupancy rate. In other cities
such as Phoenix, convention center hotels have offered bargain-basement
rates of $60 a night when there are no conventions in town.

Portland already has
one publicly subsidized hotel—the Nines, in the downtown Macy’s
building. For a time after it opened in 2008, the Nines discounted its
$260 rooms to $99 a night. The Nines is thriving now, but city records
show it has failed to make any payments since 2009 on $17 million in
city loans.

City Commissioner
Amanda Fritz, who provided the only “no” vote when the city decided to
subsidize Jeld-Wen Field, is more positive.

“I think it will
bring in a whole host of taxes and revenues beyond what’s needed for
debt service,” Fritz says. Commissioner Dan Saltzman agrees. “I’ve still
got some questions, but I’m pretty comfortable with the deal,” he says.

“I cannot support taking all the revenue from the hotel to subsidize Hyatt,” Novick says.

At Multnomah County,
Commissioners Judy Shiprack and Diane McKeel have expressed enthusiasm
for a project that promises to create 2,000 construction jobs and 900
permanent jobs. Commissioners Loretta Smith and Deborah Kafoury and
acting Chairwoman Marissa Madrigal are less enthusiastic but are
probable “yes” votes if they get assurances that no public money will go
into a proposed private parking garage and the price paid for
Schlesinger’s land is not above appraised value. (The projected purchase
price is very close to Schlesinger’s cost.)

Although both sides
are lobbying officials hard, neither side is spending much on
contributions. Schlesinger gave Hales $1,700 in 2012 and one of
Sondland’s companies contributed $5,000 to Saltzman’s Portland
Children’s Levy last year, but otherwise, their contributions are small.

The transaction Hughes drew up makes it easy for others to vote yes.

First, he’s got
financial projections that suggest the city and county would have little
risk even if the hotel flopped. Second, the deal provides new cash to
both governments.

The incentives start
at $250,000 each for the city and county in the first year, and
escalate to $1 million for the county and $650,000 for the city by the
10th year.

Bergstein says that new money amounts to institutional bribes.

“It’s just there to get elected officials to vote yes,” he says.

Metro’s projections
show the hotel will have to attain about a 75 percent occupancy rate at
$125 per night to repay the $60 million.

A leading critic of
convention subsidies, professor Heywood Sanders of the University of
Texas at San Antonio, thinks that’s unlikely. Sanders says many cities,
including Baltimore, St. Louis and Phoenix, have invested far more than
Metro wants, only to end up attracting far fewer conventioneers than
projected.

“It’s an arms race that never ends,” Sanders says.

However, Metro
consultant Tom Hazinski told a City Club audience during a debate Sept. 6
that Portland is different from other cities.

“There’s a sense of vibrancy and place other cities have a hard time manufacturing,” Hazinski said.

Metro ordered an
independent financial evaluation that simulated declines in travel like
those that followed 9/11 and the 2008 recession, concluding even in such
downturns there would be sufficient hotel taxes to repay hotel debt.

Dan Anderson, a retired Portland banker who has tracked the hotel deal closely, is skeptical of Metro’s due diligence.

“They’ve gone out and
hired multiple certified smart people,” Anderson says of Metro. “But
how good are the forecasts? We’re not going to know until it’s too
late.”

Even if city and county officials green-light the hotel, the decades-long dance probably will not end there.

That’s because opponents, led by Sondland, are prepared to refer the issue on the election ballot next year.

“Do the voters of
this region want to give a multibillion-dollar corporation tens of millions in
subsidies?” Bergstein asks. “Probably not.”

The Player: Gordon Sondland

GORDON SONDLAND

Image courtesy of Gordon Sondland

Tall, tanned and well-tailored, Gordon Sondland, 56, is a
controversial figure. His investment group owns stakes in five downtown
Portland hotels—the Lucia, deLuxe, Governor, Benson and Westin—making
him an opponent of a subsidized Oregon Convention Center hotel.

Sondland is both
media-shy (he declined to be interviewed for this story) and eager for
recognition. He negotiated hard to get a staircase named after him and
his wife, Katherine Durant, at the Portland Art Museum. (Durant is a
member of the Oregon Investment Council, which oversees the management
of $70 billion in pension and public funds.)

A Seattle native, he
irked Portland’s establishment in 2008 when he built a house on Ocean
Avenue in the coastal town of Gearhart.

Homes there typically
do not obstruct the views of others. Sondland ignored that practice
when he built his $1.2 million beach house.

“There’s an unwritten
rule that you don’t punch your house out and block views,” says another
homeowner. “He punched out and pissed off the neighbors.”

In
Portland, Sondland funded parks bureau concerts and contributed to
school-bond campaigns. But a Jantzen Beach building he owns attracted
the scrutiny of police and state officials in recent years for its high
concentration of lottery delis.

In 2010, The Oregonian put a story about Sondland’s sharp-elbowed lending practices on the front page.

Borrowers
said Sondland’s Gregory Funding knowingly extended rescue loans to
people who could not afford them. An unusually high percentage resulted
in Sondland’s group taking over the properties.

The state
investigated Gregory and a subsidiary. In a 2011 internal memo, David
Tatman, administrator of the Oregon Division of Finance and Corporate
Securities, called Sondland’s mortgage company “an enterprise that has
chosen to engage in an activity that [the state’s lead investigator]
describes as ‘unsavory’ and I would characterize as bottom feeding, that
serves to take advantage of people’s misery and take even more money
from those that are financially distressed.”

In December 2012, the state fined Gregory Funding $50,000, the largest fine it levied that year against a mortgage lender.

Although Sondland’s
lobbyists complain about the proposed Hyatt subsidy, Greg Peden, a
spokesman working for the Hyatt hotel team, says Sondland’s downtown
hotels benefit from historic-property tax reductions. Such tax breaks,
which are good for up to 15 years, have already saved Sondland and his
partners nearly $3 million, according to a Multnomah County assessor’s
estimate, and will eventually save at least twice that amount.

And if Sondland
really cared about taxpayers, Peden says, he’d stop claiming to be a
Washington resident. Sondland chairs two Oregon boards, his children
attend school in Portland and his wife lives here, but records show his
legal address is a Seattle hotel.

Washington, of course, charges no personal income tax. In Oregon, the top rate is 11.5 percent.

But the most
controversial part of the deal is the $60 million Metro Council
President Tom Hughes wants to borrow to help fund construction.

Currently, local
hotel taxes go into a pot that pays interest on previous public
borrowing, including bonds for the convention center, Portland Center
for the Performing Arts and Jeld-Wen Field. But the taxes generated at
the new Hyatt would be used only to repay Metro’s debt.

This method is called “but for” financing, because the taxes would not exist “but for” the new hotel.

Portland economist Joe Cortright says there are two problems with that approach.

The first is fairness.

“There are a lot of
people and a lot of companies who’d come to Oregon tomorrow if we let
them keep the taxes they’d otherwise pay to use for investment,”
Cortright says. “That would be unfair to all other taxpayers.”

The second is the
idea that the hotel taxes would not otherwise exist. In a market with
occupancy rates as high as Portland’s, private developers will continue
to build hotels.

“That’s tax money
that could go to other uses,” Cortright says. “Not to debt service on a
hotel we probably don’t need.”

"In the low usage areas, we found that our vehicles sit idle four times longer, ultimately affecting overall vehicle availability for the Portland membership base, as well as parking for the Portland community."

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